Back
20 Mar 2014
Markets still digesting the FOMC - Societe Generale
FXStreet (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale, explains the effects of yesterday's FOMC statement.
Key Quotes
"The UK will have lower Gilt sales than expected, we won't all have to buy annuities when we retire, and if the Conservatives are re-elected, there is a lot of fiscal tightening in the pipe, as public spending is cut back. The caveat, that they have to win an election next year, is important but either way if I fast-forward through time, I think GBP/USD will be a good bit lower in 2016 whoever is in power, and I think that if the Conservatives were to win, Gilts would be doing a lot better than Treasuries by then too."
"The FOMC was the big news overnight and I thnk it leaves 10yr Treasury yields meandering upwards towards but not necessarily oput of their 2.5-3% range, supports the dollar but doesn't really cause a major shake-up of markets. This was a much milder piece of forward guidance than last May's introduction of tapering."
"Reading the dots: More FOMC members now expect to see higher rates in 2015, and the average expectation for end-2016 is now close to 2.5%, though the ‘long-term' expectations remain in a 3.5-4.25% range, with an average just below 4. Three points seem relevant. Firstly, with more members expecting rates to be at 1% by the end of 2015, there is an increased possibility that the first hike comes a bit earlier (in Q2?)."
"Secondly, there is recognition that the Fed will need to move briskly once they start, which is reflected in a wide range of expectations for 2016 but a higher average. And thirdly, there is no change, yet, to the expected final destination of policy."
"So the forward guidance is that the soft data over the winter has not affected the Fed's resolve to continue tapering and to raise rates, starting in 2015. How much of an impact should this have on markets?"
"I have referred regularly to the 1yr US rate 5 years forwards as a way for thinking about market expectations of the 'long-term' rate outlook and this, after jumping from 2.2% a year ago, has been in a 3.6-4.2% range since last autumn. So smack in line with the FOMC long-term dots which haven't changed... "
"This range has been consistent with the dollar moving sideways, FX vol falling and investors seeking out yield/carry. While the range holds, I doubt we will see major follow-through of dollar strength across the board - the trigger for that will be a break, with 10-year Treasury yields moving above 3%. So the question then is, what does meandering upwards within a range do? lowish vol, strongish dolalr, buying dips in equities and credit but a bearish bias in Treasuries?"
Key Quotes
"The UK will have lower Gilt sales than expected, we won't all have to buy annuities when we retire, and if the Conservatives are re-elected, there is a lot of fiscal tightening in the pipe, as public spending is cut back. The caveat, that they have to win an election next year, is important but either way if I fast-forward through time, I think GBP/USD will be a good bit lower in 2016 whoever is in power, and I think that if the Conservatives were to win, Gilts would be doing a lot better than Treasuries by then too."
"The FOMC was the big news overnight and I thnk it leaves 10yr Treasury yields meandering upwards towards but not necessarily oput of their 2.5-3% range, supports the dollar but doesn't really cause a major shake-up of markets. This was a much milder piece of forward guidance than last May's introduction of tapering."
"Reading the dots: More FOMC members now expect to see higher rates in 2015, and the average expectation for end-2016 is now close to 2.5%, though the ‘long-term' expectations remain in a 3.5-4.25% range, with an average just below 4. Three points seem relevant. Firstly, with more members expecting rates to be at 1% by the end of 2015, there is an increased possibility that the first hike comes a bit earlier (in Q2?)."
"Secondly, there is recognition that the Fed will need to move briskly once they start, which is reflected in a wide range of expectations for 2016 but a higher average. And thirdly, there is no change, yet, to the expected final destination of policy."
"So the forward guidance is that the soft data over the winter has not affected the Fed's resolve to continue tapering and to raise rates, starting in 2015. How much of an impact should this have on markets?"
"I have referred regularly to the 1yr US rate 5 years forwards as a way for thinking about market expectations of the 'long-term' rate outlook and this, after jumping from 2.2% a year ago, has been in a 3.6-4.2% range since last autumn. So smack in line with the FOMC long-term dots which haven't changed... "
"This range has been consistent with the dollar moving sideways, FX vol falling and investors seeking out yield/carry. While the range holds, I doubt we will see major follow-through of dollar strength across the board - the trigger for that will be a break, with 10-year Treasury yields moving above 3%. So the question then is, what does meandering upwards within a range do? lowish vol, strongish dolalr, buying dips in equities and credit but a bearish bias in Treasuries?"